Form 656: Booklet Offer in Compromise

The Internal Revenue Service (IRS) utilizes Form 656, also known as the Offer in Compromise (OIC) Booklet (Form 656-B), to guide taxpayers through the process of submitting an offer to settle their outstanding federal tax liabilities for less than the full amount owed. This booklet serves as a valuable resource for individuals and businesses struggling to meet their tax obligations.

What is an Offer in Compromise (OIC)?

An OIC is a formal agreement between a taxpayer and the IRS. The taxpayer proposes a lump sum payment or a series of payments to settle their tax debt in full. The IRS considers various factors before accepting or rejecting an OIC, including the taxpayer's ability to pay, income, expenses, and overall financial situation.

Who Should Consider Filing Form 656?

Form 656 might be a suitable option for taxpayers who:

  • Cannot afford to pay their full tax liability in full due to financial hardship.
  • Have documented extenuating circumstances that caused the tax debt (e.g., serious illness, natural disaster).
  • Believe the amount of tax owed is incorrect due to errors or penalties.

What are the chances of my OIC being accepted?

The IRS acceptance rate for OIC applications fluctuates. The strength of your application, along with your financial hardship justification, significantly impacts the approval likelihood.

Are there any fees associated with filing an OIC?

Yes, there's a user fee for submitting an OIC application. The current fee, as of April 2024, is $205. You can request a fee waiver if you meet specific low-income qualifications.

What happens if my OIC is rejected?

If your initial OIC application is denied, you have the right to appeal the decision. The OIC Booklet (Form 656) provides instructions on the appeals process.

What if I cannot afford to pay the full settlement amount proposed in the accepted OIC?

The IRS might be willing to consider an installment agreement for the OIC settlement amount. You'll need to discuss payment options with the IRS representative handling your case.

What Information Do I Need to Submit with Form 656?

In addition to Form 656, you will need to submit various documents to support your OIC application. Form 656-B provides a comprehensive list, but some common requirements include:

  • Completed Collection Information Statement (Form 433-A or Form 433-F)
  • Financial statements (e.g., income tax returns, bank statements, and proof of income)
  • Explanation of your current financial situation and future ability to pay